Three Seattle entrepreneurs started the Starbucks Corporation in 1971. Their prime product was the selling of whole bean coffee in one Seattle store. By 1982, this business had grown tremendously into five stores selling the coffee beans, a roasting facility, and a wholesale business for local restaurants. Howard Schultz, a marketer, was recruited to be the manager of retail and marketing. He brought new ideas to the owners, but was turned down. Schultz in turn opened his own coffee bar in 1986 based on Italian coffee cafes, selling brewed Starbucks coffee. By 1987, Schultz had expanded to three coffee bars and bought Starbucks from the original owners for $4 million. He changed the name of his coffee bars from Il Giornale to Starbucks. His intention for the company was to grow slowly with a very solid foundation. He wanted to create a top-notch management by wooing top executives from other well-known corporations. For the first two years, Starbucks losses doubled as overhead and operating expenses increased with Starbucks’ expansion. Schultz stood his ground and did not sacrifice long term integrity and values for short-term profit. By 1991, Starbucks’ sale increased by 84% and the company was out of debt. Starbucks grew to 26 stores by 1988. By 1996 it grew to 870 stores with plans to open 2000 stores by the year 2000.
Starbucks has become a well-known company for selling the highest quality coffee beans and best tasting coffee products. It was one of the first companies to realize that the real money to be made was in beverage retailing, not just coffee beans. Starbucks created a coffee for the coffee connoisseurs and go to great lengths to acquire only the highest quality of coffee beans. They have set new precedence by outbidding the European buyers for an exclusive crop of coffee beans, which produces one of the best coffees in the world. Roasters of Starbucks coffees are extensively trained for one year. Starbucks has the distinction of being the public’s educator on Expresso. They have also recently started to expand to packaged and prepared tea in response to the growing demand for this product.
The business strategy of Starbucks’ is identical to the corporate level strategy since the company is a single business company, focusing on only coffee-related products and retail stores. Starbucks corporate strategy has been to establish itself as the premier purveyor of the finest coffee in the world, while maintaining their uncompromised principles as to grow. The firm principles of the company are seen with its maintenance of a great and proven work environment for every staff member in its retail stores. It upholds diversity and promises the highest standards for its products. The company satisfies customers and gives back to the community and the environment. Also, Starbucks persists to be profitable and it is. They live by a strict, slow growth policy completely dominating a market before setting its sights further abroad. This strategy has gained them the advantage of being one of the fastest growing companies in the country.
The Five Forces concept of product differentiation and branding to stay above existing competitors also to the suggestion combating threat of entry, as brand image and customer loyalty are barriers to entry. However, these barriers are linked to the Starbucks core competency: fresh quality coffee, and not unrelated. Porter (1979) does not distinguish between the types of entry barriers which would be the most efficient at protecting the firm from new entrants.
With regards to the ex post limits to competition, Starbucks sustains its profits by enhancing the coffee experience. This goes hand-in-hand with imperfect resource mobility, as other firms would be unable to recreate Starbucks, due to the unique combination of furnishings, music, jargon and specialized coffee blends. Even if a new coffee bar entrant purchased Starbucks music, this by itself would not render as much rent as it does for Starbucks, because of co-specialized assets. This means that the music is only a part of complementary assets of the company, and that separated from the network of additional enhancing resources would not be as profitable. Also, in 1999, Starbucks correctly deduced that 70% of its customers were internet users, and planned in advance for future technological developments, which would make wireless access more affordable for the average customer. In 2002, therefore, Wi-Fi hotspots were installed in many Starbucks outlets. This would increase the costs to new entrants to the coffee bar market. Starbucks also claims to take care of its employees, which means that the coffee specialists could be bound to the company. Through bonuses, rewards and health plans as outlined on the Starbucks website, the company ensures employee loyalty. This would decrease the chance of competing companies poaching workers, and thus would protect rents over time. Innovation of providing Wireless Internet access helps counter Porter’s (1979) competitive force of Substitute products. Starbucks adapted itself to the changing technological industry, which has decreased the amount of substitutes for its service for now. Ex ante limits to competition imply that the costs of setting up should not outweigh the rents received. The pioneering step in coffeehouse history was when Starbucks first started pursuing such bar culture in 1984, so there was little competition in this specific field. Due to a considerable part of Starbucks venues acquired from existing cafes, costs of expansion were kept low. Furthermore, Starbucks’ prior reputation as a coffee specialist helped it gain ground in the coffeehouse market, as customers knew the quality of the product. As Starbucks expanded, it vertically integrated backwards, being aware of its roots as roaster. The importance of firm history constrains the firm’s future. This is important, as Starbucks made the most of its expertise in coffee roasting to cater for its mainstream coffee bar business, and decided to open coffee roasting plants, in 1990, 1993 and 2000. This means that the company nurtures and refines its core competence – coffee, which is the key to its success. The FF model mentions that a firm should be aware of Powerful suppliers, if they possess the potential to integrate forward. However, by focusing on coffee and growing large, it is Starbucks that holds the power, as it has a low concentration of suppliers, and buys large amounts of coffee beans. This also means that Starbucks has fewer suppliers in different product areas, so there are fewer unprotected links. At the other end, Starbucks main distribution mostly takes place through its own retail outlets, and the end customers are so diverse that there is little danger of them integrating backwards. Starbucks’ focus on coffee and coffee bar atmosphere meant that it was able to pursue different markets whilst keeping diversification to an appropriate level. There is an optimal amount of diversification that a company can have before marginal market rents are zero. What is interesting is that Starbucks’ different market interests are related to either improving the coffee or the coffee experience, or improving the brand image. Examples include: Kraft Foods Inc partnership to improve selling Starbucks fresh coffee in grocery and warehouse markets, acquiring Hear Music, a music company, in 1999, to pursue the development of background music in coffeehouses; stepping into partnerships with bookshops such as Borders, to appeal to readers; and supporting Fair Trade coffee to promote the company’s (Starbucks) social responsibility. Starbucks specifically chose not to concentrate on the online sales business, rather to use its website to direct customers to coffeehouses, and to further improve brand image. This demonstrates commitment to development of core competencies vital for an organization; they state that to succeed, companies must identify, cultivate and exploit the core competencies that make growth possible.
The generic strategies of Starbucks comprise strengths, opportunities and weaknesses. Starbucks Corporation is a very profitable organization, earning in excess of $600 million in 2004.The company generated revenue of more than $5000 million in the same year. It is a global coffee brand built upon a reputation for fine products and services. It has almost 9000 cafes in almost 40 countries. Starbucks was one of the Fortune Top 100 Companies to Work For in 2005. The company is a respected employer that values its workforce. Starbucks have weaknesses like any businesses inexistence. Starbucks has a reputation for new product development and creativity. However, they remain vulnerable to the possibility that their innovation may falter over time. The organization has a strong presence in the United States of America with more than three quarters of their cafes located in the home market. It is often argued that they need to look for a portfolio of countries, in order to spread business risk. The organization is dependant on a main competitive advantage, the retail of coffee. This could make them slow to diversify into other sectors should the need arise.
Starbucks are very good at taking advantage of opportunities. In 2004 the company created a CD-burning service in their Santa Monica (California USA) cafe with Hewlett Packard, where customers create their own music CD. There are new products and services that can be retailed in their cafes, such as Fair Trade products. The company has the opportunity to expand its global operations. New markets for coffee such as India and the Pacific Rim nations are beginning to emerge. Co-branding with other manufacturers of food and drink, and brand franchising to manufacturers of other goods and services both have potential.
Politically, Starbucks retail stores located outside of North America, the United Kingdom, Thailand and Australia are operated through a number of joint venture and licensing arrangements with prominent retailers. During fiscal 2000, the Company expanded its international presence by opening 184 new international licensed stores, including the first stores in Lebanon, the United Arab Emirates, Qatar, Hong Kong and Shanghai. At fiscal year end, the Company had 154 stores in Japan, 47 in Taiwan, 28 in China, 28 in Singapore, 27 in the Philippines, 20 in Hawaii, 15 in New Zealand, 14 in Malaysia, six in South Korea, five in the United Arab Emirates, four in Kuwait, three in Lebanon, and one in Qatar.
Economically, Starbucks specialty operations strive to develop the Starbucks brand outside the Company-operated retail store environment through a number of channels. Starbucks specialty operations include retail store licensing agreements, wholesale accounts, grocery channel licensing agreements and joint ventures. Starbucks specialty operations also include direct-to-consumer marketing channels. In certain licensing situations, the licensee is a joint venture in which Starbucks has an equity ownership interest.
Socially, Starbucks also sells whole bean and ground coffees to several types of wholesale accounts, including office coffee distributors and institutional foodservice management companies that service business, industry, education and healthcare accounts, and hotels, airlines and restaurants. By the end of fiscal 2000, the Company’s whole bean and ground coffees were available throughout the United States in approximately 16,000 supermarkets. The Company has two non-retail domestic 50-50 joint ventures. The North American Coffee Partnership, a joint venture with the Pepsi-Cola Company, a division of PepsiCo, Inc., was formed in fiscal 1994 to develop and distribute ready-to-drink coffee-based products. By the end of fiscal 2000, the joint venture was distributing bottled Frappuccino coffee drink to approximately 250,000 supermarkets, convenience and drug stores and other locations throughout the United States and Canada. The organization has strong ethical values and an ethical mission statement as follows, ‘Starbucks is committed to a role of environmental leadership in all facets of our business.’
Technologically, the Company makes fresh Starbucks coffee and coffee-related products conveniently available via mail order and on-line. Starbucks publishes and distributes a mail order catalog that offers its coffees, certain food items and selects coffee-making equipment and accessories, and the Company maintains a web site at www.starbucks.com with an on-line store that allows customers to browse for and purchase coffee, gifts and other items via the Internet. The Company believes that its direct-to-consumer operations support its retail store expansion into new markets and reinforce brand recognition in existing markets.
In connection with the transition of Starbucks should make a transition from Sun-grown coffee to shade-grown coffee on an ethical basis. A thorough investigation yields that intelligent business practices are not always based on ethical practices. Many environmental positives were identified with growing shade-grown coffee. These positives points included decreasing erosion, usage of pesticides and increasing production, wages, prices internationally, and promoting biodiversity. These are all extremely important environmental issues associated with growing coffee beans.
There are numerous positive effects for Starbucks Coffee Company first-hand as well. One of the largest positive effects for Starbucks is the image that would accompany such a large-scale environmental effort. Ansoff’s matrix, a system that compares markets and products can be used to analyze the positives and negatives of a business, or a new product. On Ansoff’s matrix, switching their sun-grown coffee to shade-grown coffee could be classified as a new product and a new market, implying “diversification” or as a new product in an established market, implying “product development”. Shade-grown coffee would bring in a new market of those consumers who are focused on environmentally friendly coffee. Those consumers who may patronize competitors such as “Caribou coffee”, which offers only shade-grown coffee, may begin to patronize Starbucks instead. Also, those consumers who may consciously avoid Starbucks due to their sun-grown coffee may begin to consume Starbucks coffee. The established market would be the consumers who always drink Starbucks coffee. The regular consumers would begin to drink the Shade-grown coffee if that is the only option. This would mark the introduction of the new product to Starbucks’ established market.
Starbucks has become a great successful company in the coffee bean and beverage business and its strategy has been very effective. From the beginning, Schultz, the company’s owner, has professed a strict, slow growing policy. He feels it is also important to keep all the stores company owned to improve and grow the business further. To further grow, Starbucks will need to expand further in other areas of the United States as well as internationally. Future joint ventures will expand the products into grocery and convenience store shelves through bottled beverages and ice cream flavors. Other joint ventures will allow further expansion into the brewery business, which will produce beer with Starbucks’ coffee beans. Other partnerships will bring new products for Starbucks, such as jazz CDs, and tandem units with bagel bakeries. As the company expands, the culture and corporate strategy must be maintained for success. This will ensure the health of the organization throughout any future expansion.
There are no other national coffee bar competitors in the same scale as Starbucks. Starbucks is the only competitor in the coffee bar market that has a recognized brand image. The difference between Starbucks and other coffeehouses is that they own all their stores and do not franchise. A Starbucks store operates in most metropolitan areas of the United States and also has a direct mail business to serve customers in every state. They have introduced gourmet flavored decaffeinated coffees as well as specialty flavors and whole bean coffees for the faithful coffee drinkers. They have also added light lunch fare to their menu. Starbucks had recently expanded its emphasis internationally. There are opportunities waiting in possible joint ventures with other corporations to design new product associations with Starbucks’ coffee.
No one knows if the market for coffee will grow and stay in favor with customers, or whether another type of beverage or leisure activity will replace coffee in the future? Starbucks are exposed to rises in the cost of coffee and dairy products. Since its conception in Pike Place Market, Seattle in 1971, Starbucks’ success has lead to the market entry of many competitors and copy cat brands that pose potential threats. Time will tell whether if Starbucks will stay in their position in the industry or get better or get worst.